PERSPECTIVES Economic and asset class outlook March 2025

Macroeconomics: Confrontational competition

• Growth: U.S. exceptionalism moderating – Europe‘s awakening
• Inflation: Not conclusively beaten yet
• Central banks: Restrained easing versus dominant fiscal stimulus  

The U.S. economy continued to grow at a robust pace in the final quarter of 2024, expanding 2.8% for the year. Increasing uncertainties over the political path of the new U.S. administration recently raised concerns over a soft patch of the economy. However, the labour market remains resilient and real wage growth should continue to boost the purchasing power of consumers. As the year progresses, diminishing uncertainty about the final tariff regime should improve private sector sentiment and a drawdown of inventories may occur. Nevertheless we expect GDP growth to slow to 2.0% in 2025 and 2026. 

Economic resilience should dampen disinflation and keep inflation elevated during 2025 and 2026, limiting the Fed‘s scope for further easing. Over the next twelve months, we anticipate two more cuts, bringing the Fed Funds rate to 3.75-4.00% by the end of Q1 2026. 

The Eurozone economy is weak and is yet to experience an urgently needed awakening, partly due to political uncertainties. The geopolitical realignment of the U.S. and how the Russia-Ukraine war unfolds present both risks

and opportunities for Europe. The intended defence and infrastructure investment initiatives could trigger an economic upturn in the medium term. In the short term, however, Europe will probably have to rely on U.S. suppliers for their defence equipment. We expect economic momentum in the Eurozone to accelerate slowly from H2 2025, slightly lifting GDP growth to 1.0% in 2025 and further, as the multiplier effect of higher fiscal spending unfolds, to 1.5% in 2026.

Inflation is likely to remain on a bumpy path in the near term due to volatility in food and energy prices. A stronger fiscal impulse could add to price pressures in H2 2025 and beyond, with inflation to settle at 2.3% this year and in 2026. Against this backdrop, we anticipate the ECB making only one further cut over the next four quarters, which would bring the deposit rate down to 2.25% by March 2026. 

In Japan, this year‘s Shunto wage settlement could exceed last year‘s 5%, setting the stage for robust domestic demand. We expect the economic upturn to continue despite potential headwinds from higher U.S. tariffs and to drive up GDP growth in 2025 to 1.2%. Against this backdrop, inflation is likely to reach 2.6% in 2025, above the BoJ‘s 2% target. The planned monetary policy normalisation may be accelerated and the BoJ key rate may be raised from 0.5% currently to 1.25%. 

Having achieved its 5% growth target in 2024, China will probably focus on boosting domestic consumption, bolstering strategic industries and supporting private enterprises in 2025. Given the headwinds from higher U.S. tariffs, with further tit-for-tat retaliation likely, and the property market still not out of the woods, we expect GDP growth to slow to 4.5% and 4.0% in 2025 and 2026 respectively. This should keep price momentum low, making monetary stimulus less effective. We therefore expect only a gradual easing of financial conditions.

Fixed Income: A new equilibrium for Bunds

• Soft patch in the U.S. is masking the upward pressure on yields
• A new equilibrium for Bunds as fiscal levers are loosened
• Not only carry but also the high quality of Investment Grade will keep it well bid 

 While the policy uncertainty may have dragged down U.S. Treasury yields recently, long-term inflation expectations remain elevated, limiting the downside for yields. Once the economy has emerged from the soft patch, we expect yields to move higher as investors forego the need for the safety provided by Treasuries. The focus should return to the resurgence in growth, supported by the impending fiscal support and the inflationary impact of tariffs.

Therefore, we expect a continued build-up of term premium and correspondingly see Treasury yields climbing higher (March 2026, 10-year yield target: 4.50%; 2-year yield target: 3.95%). 

The yield environment for German Bunds has changed as the designated governing parties show urgency to provide the much-needed fiscal support. This planned additional spending is to be largely debt financed, bringing a substantial supply of Bunds into the market. With increased national debt, investors will demand higher compensation. We therefore expect Bund yields to move to a new equilibrium (March 2026, 10-year yield target: 2.90%; 2-year yield target: 2.25%). 

Italian bond yields should benefit from the greater EU cooperation in the current geopolitical environment.

In addition, the relative impact of German fiscal support should be felt more in Bunds than in other European government bonds, minimising the potential widening of Italian spreads to Bunds. 

Investment Grade (IG) credit continues to enjoy strong demand in both USD and EUR, which we expect to persist going forward. Nevertheless, spread momentum in both currency markets has diverged recently. After initially falling appreciably due to high demand the risk premia of USD IG credit recently widened again. Conversely, EUR IG spreads have tightened further and now better reflect the underlying quality of the market and economic optimism. Further spread tightening is likely to remain elusive but all-in yields provide an attractive income opportunity. 

High Yield (HY) spreads have also widened recently on the back of geopolitical frictions and economic uncertainty, especially in the U.S. Despite this, spreads remain close to historically tight levels. A further widening to compensate for the risks appears necessary. ‘CCC’ issuers still face significantly high refinancing costs with the difference in current coupons and market yields as much as double in the USD and triple in the EUR market. 

We expect a slight widening of EM Sovereign spreads from historically tight levels, as solid fundamentals seem to be sufficiently priced. Also, the current spreads offer minimal cushion against protectionist trade measures, global growth concerns and monetary policy risks. The same risks remain true for Asia Pacific credit. However, improving balance sheets and steady default rates should continue to support tight spread levels. All that being said, current yields, which are well above their post-GFC average, provide an attractive proposition for carry-driven total return.

Equities: Volatility is back

• U.S. stocks to move higher, but with increased volatility
• European stocks remain attractively valued
• DeepSeek brought Chinese stocks back into the limelight 

The S&P 500 posted a solid start to the year as reported Q4 earnings topped analysts’ expectations significantly.

However, after reaching a new all-time high in February, the index has retreated amid declining economic momentum and rising policy uncertainty. Additionally, the emergence of China’s AI model DeepSeek-R1 made investors question hyperscalers’ capex spend as well as U.S. dominance in AI more broadly. The “Magnificent 7” TMT companies have collectively lost around 20% since mid-February, while the S&P 500 has plunged into negative year-to-date performance territory. 

As stated in our annual outlook for 2025, we expect stock market volatility to remain elevated. However, we believe that the U.S. equity market could move higher in a “three steps forward, two steps back” pattern this year. We highlight that the S&P 500 typically advances in the absence of a recession – which we do not expect to occur – and follows company earnings in the long term.

Consensus analysts project double-digit earnings growth for each year until 2027. Hence, long-term investors could use extended stock market weakness as buying opportunities. However, after the recent setback, we scale back our S&P 500 target to 6,300 points – still implying double-digit upside. 

While U.S. stocks have struggled, their European peers have rallied so far in 2025 amid incremental improvements in economic data and hopes of a ceasefire in Ukraine and strong fiscal expansion by Germany and the EU. The recent rally has lifted the valuation metrics of European stocks back to historic average levels. However, despite the recent outperformance the valuation discount to U.S. stocks remains significant at some 30%. Hence, we remain bullish on European stocks. Our new target for the STOXX Europe 600 is 570 points for March 2026. 

Moving to Asia, Japanese companies reported strong results in the recent earnings season which prompted the highest consensus earnings estimate upgrades worldwide. Still, Japanese stocks have underperformed due to rising bond yields and an appreciating JPY. While further currency strength may remain a headwind for Japanese stocks, we see upside in the longer term. Japan’s economy is accelerating and has so far been relatively insulated from U.S. trade tariffs. 

Chinese stocks have been showing some positive signs of resurgence despite new import tariffs from the U.S. Notably, the positive performance is driven by strong ‘bottom-up’ developments rather than stimulus activity – i.e. DeepSeek’s breakthrough solidified China’s strong technological capabilities. A combination of emerging cutting-edge AI technology matched with cheap valuations highlights the long-term upside of investing in Chinese stocks. We also see room for the Indian stock market to recover from its recent correction. Valuations have declined significantly and are closing in on historic averages, which we view as attractive entry levels.

Commodities: Gold outshining its peers

• Gold bolstered by trade conflicts and rising inflation expectations
• Copper has benefited from frontloading and could suffer from tariffs
• Oil markets heading for a supply surplus – barring delivery bottlenecks

Since the beginning of the year, gold prices have continued their sequence of hitting new record highs. Strong demand from central banks and Asian investors continues. Prices were also supported by buyers of gold ETCs, particularly in North America, and robust long positioning by investors on the U.S. futures exchanges. Gold thrives as a “safe haven” in times of high political uncertainty (particularly when caused by tariffs or trade conflicts) and benefits from its reputation as a protection against inflation. State budget deficits remain a bullish factor, too. Due to the strong long positioning on the U.S. futures exchanges, there may be occasional profit-taking and short-term price setbacks, as has recently been the case. In the medium term, however, we believe that a continuous upward trend in gold prices is intact and our forecast is USD3,250/oz for March 2026. 

LME Copper recovered to around USD9,660/t, an increase of around 10% since the beginning of the year. However, copper prices on the U.S. futures exchanges rose almost twice as much. This was due to the U.S. government‘s announcement of potential 25% tariffs on copper imports into the U.S., which led to frontloading of purchases. The sharply increased copper inventories may be reduced in the coming months, which could result in weaker copper demand, especially if a slowdown in the global economy occurs due to trade conflicts (March 2026 target LME copper: USD9,430/t).

Oil prices have been under pressure as growth concerns have emerged with regards to the U.S. economy, the world’s largest oil consumer. At the same time, Chinese apparent oil demand (refined output + net imports - change in inventories) has been falling for the past few months.

Nevertheless, other Asian economies, including India, are showing strong demand conditions. On the supply side, non-OPEC+ supply remains strong. In addition, OPEC+ members will start scaling back their voluntary cuts gradually from April, adding around 140kbbl/d per month. As things stand, there is likely to be a small surplus in oil markets. Questions have been raised on the price impact of a possible ceasefire in the Russia/Ukraine war and a potential easing of sanctions on Russia down the line. This scenario still appears highly improbable at present, but even if this were to happen, we do not see a significant impact being caused, given that the bigger constraint on Russian oil production over the last year has been the OPEC+ quotas rather than sanctions. However, a tightening of sanctions on Iran could materially constrain supply and boost oil prices (March 2026 Brent target: USD69/bbl). 

Carbon prices are likely to push higher going forward as carbon credits markets shift into a supply deficit from next year, when the free allocation for aviation will end and sectors covered by the carbon border adjustment mechanism will see their free allocation phased out. Increased industrial activity in Europe should also strengthen the demand for carbon credits.

Currencies: USD rally halted

• U.S. dollar suffering due to tariff policy and economic concerns
• Euro benefiting from planned fiscal stimulus
• Yen being supported by expected further rate hikes 

EUR: After the USD showed strength at the beginning of this year, rising to a two-year high in trade-weighted terms, there has recently been a strong counter-movement. This change is due to three factors: 1) Tariffs have become a dominant topic and are causing significant volatility. The financial markets are currently focusing on the potentially dampening effects of import tariffs on the U.S. economy, 2) A swathe of unexpectedly weak data from the U.S. has been reported recently, particularly regarding consumer confidence, which has also prompted some market fears of an economic downturn or even stagflation, 3) Discussions about a significant increase in spending on infrastructure and defence by the potential new governing coalition in Germany are currently boosting hopes of more robust economic development in Germany and the Eurozone.

Recently, portfolio shifts due to the mixed performance of the equity markets in the U.S. and the Eurozone are likely to have supported the EUR. Yield spreads have also narrowed while the growth differential is also expected to contract.

If the planned stimulus measures in Germany achieve their objective, the EUR could continue to appreciate against the USD in the medium term. We see EUR/USD at 1.15 at the end of March 2026. 

GBP: In the UK, recent economic data frequently exceeded market expectations, but inflation is also proving more persistent than the market consensus expected.

Furthermore, the UK is likely to benefit from an economic recovery in the Eurozone once the planned stimulus measures kick in. Looking ahead to March 2026, the GBP has appreciation potential against the USD to GBP/USD 1.38. 

JPY: Japan’s growth remains robust, supported by strong private consumption and prospects of significant wage hikes. Rising real wages are boosting the BoJ’s confidence regarding further policy normalisation. The BoJ is expected to speed up this process of normalisation in 2025, narrowing the differentials with U.S. interest rates. Furthermore, repatriation of Japan’s foreign assets could occur as ongoing BoJ hikes would be expected to result in more compression of rate differentials relative to the U.S. and the Eurozone and thereby strengthen the JPY. After the northern European currencies, the JPY is one of the strongest G10 currencies in 2025, having appreciated by 5.5% against the USD since the beginning of the year. This appreciation is likely to continue at a moderate pace within our observation period. We forecast USD/JPY at 140 at the end of March 2026. 

CNY: To date, the new U.S. administration has imposed 20% tariffs on Chinese imports. China then resorted to counter-tariffs. To mitigate its reliance on exports China plans to boost ailing private consumption through stimulus measures. Unless the trade conflict with the U.S. escalates further, the CNY should weaken only moderately – our target for the end of March 2026 is USD/CNY 7.45.